Incorporating in California
November 15th, 2020
Setting up business in California
When I was asked to write an article about the practicalities and pitfalls of setting up and doing business in California, I had an immediate negative reaction to the state I have called home for a decade. As a long-time Board Member, COO, CFO and investor doing business across the US and abroad, I have always found establishing and complying to regulations in California has been especially difficult. Despite my experiences that have driven these notions, I wanted to try to look at the exercise in a balanced and factual way.
You must be dreaming?
The CFO in me thinks first about the significant and ever-changing regulations, complicated and expensive tax policies, and overall cost of doing business in California. There are real burdens and hard and soft costs, especially for small and medium sized businesses that lack the sophistication and expertise to understand and attend to all that California requires. These costs are ultimately passed on to the end consumer in the form of higher prices for products and services or to the taxpayers in the form of both obvious and hidden taxes, throughout the value chain. All of this considered, it is not surprising that California is routinely rated as one of the worst business climates in the US.
Despite these cumbersome and expensive hurdles, California has more to offer than most other economies in the world. The state is often in the top 7 of the world economy rankings and was as high as 5th in 2018, surpassing the United Kingdom, according to the Los Angeles Times. With over 40M people and diverse and generally growing sectors including Technology, Entertainment, Agriculture, Real Estate and Financials Service, it is no surprise California’s GDP exceeded $3 Trillion in 2019. The public university system is one of the best and well-funded in the country, with renowned private colleges as well.
In recent years, there has been a movement to split California into multiple states, which could leave the area resembling the Northeast region of the United States. These ideas could fill another essay of their own, but the notion is based in the diverse economic and political interests housed under the California Republic flag. The diverse base of businesses and extensive workforce leads to significant opportunities for all sizes of companies.
The impacts of the COVID-19 pandemic on California will take months, if not years, to understand and measure. The state government moved quickly with stimulus and supplements to those directly affected by the virus, as well as impacted businesses and displaced workers. This, coupled with billions in damage from wildfires and an aging infrastructure, have led to a fear among many that increased taxes are inevitable, on top of an already weighty state tax regime. In many sectors, work from home has proven to be a viable and even preferable option, which has enabled certain workers to keep their California based jobs while relocating to lower cost states.
Opportunities v Costs
All of this considered California is a complicated domicile for companies and workers. It offers exceptional opportunities across thriving industries along with rich education, culture, entertainment and recreation. All of this opportunity does come at a significant cost. Most companies attempt to mitigate these costs by establishing themselves in another state – Delaware is still most common, with Nevada, Wyoming, Texas and others becoming popular options – and registering to do business as a foreign entity in California. Any business planning on doing business in the state should budget adequate legal, accounting and tax expenses to understand and comply with the requirements.
Bill Kehoe operates both within the US and on the international stage as a key strategic board member supporting his corporate clients as they land & expand. Briars has indeed been fortunate to work with Bill over the years. https://www.linkedin.com/in/bill-kehoe-5815276/